Chapter 19 - Pensions and Other Employee Future Benefits Flashcards
What is a pension plan? Who has the benefits of this asset? How long should these assets last?
A legal entity (a trust) separate from the company that sponsors the plan. The members of the plan or the employees. Lifetime annuities for the retirees.
What is a contributory plan? What is a non-contributory plan?
Contributory means that the employer and employee both pitch into the plan. Non contributory means that only the employer pitches in.
What is vesting? What is an example?
Employees gain title to benefits paid into the plan by the company or sponsor. You do not get the benefits of the CPP until you have worked for the company for at least 5 years.
What happens to the contributions if an employee pulls out before the maturity contribution time of the employer?
They will only be able to get the contributions that they made and the earned interest on top of that. The portion that went to the quit employee will not be allocated to the other members of the plan.
How long is the pension expense recorded? Why do we record the expense as they work and not when they are retired?
From the date that the plan member is hired until they are eligible to receive the benefits usually at the time of retirement. This is the point where there was an obligation to pay out the pension.
What are the two major types of pension plans?
Defined contribution and a defined benefits plan.
What happens under the contribution plan? Describe it.
Under the contribution plan, both the employee and employer will make periodic payments in which an independent trustee will administer the plan, thus distinct from the corporate entity.
Whatever the plan earns over the working life of the employee, is what they will get when they retire.
Who are the beneficiaries of the trust?
What is the company’s obligation under the contributed plan
The employees are the beneficiaries of the trust.
They just must make their contribution, but there is no commitment as to what value it will grow to.
What does the pension expense consist of? How do we account for contributions to past service employees? What happens if a company fails to contribute the amount within a given year?
It consists of the contributions payable for the past employees and the current year’s service costs. An obligation and the related expense immediately. A pension payable liability will arise.
What is the only disclosure needed in this type of plan?
Only disclosure needed is the present value of required future contributions in respect of the past service.
What are benefit plans? How are the pension benefits defined and why does this cause issues?
Similar to above, this is a separate legal entity. The employer guarantees that the employee will receive pension payments based on a percentage of earnings while they are working. The pension benefits are defined by an employment agreement, and therefore it is difficult to determine how much must be paid out each year.
Under the benefits plan who administers it and who is the beneficiary?
The company is the beneficiary as they incur the risk of ensuring payments are made in the future, and the plan is still administered by a trust.
What are factors that determine how much must be contributed to a plan?
- Inflation
- Mortality rates
- Salary escalation plans
- Expected rates of return
- Number of years of work.
What is an actuary? Why is accounting for benefit pension plans complex?
It is a professional that assists the company in determining these contributions. They are complex because of all the estimates involved, and the focus is on accounting from the perspective of the company sponsoring the plan.
How do we record when an employer contributes to a pension plan?
Dr - Pension Liability
CR - Cash
(If contributions are less than the previously recorded expense)
Dr - Pension Asset
CR - Cash
(If contributions are greater than the previously recorded expense)
What are the two major items on the statement of financial position from the pension plan? What is the pension obligation? How are the pension assets received?
The pension assets and the pension obligation.
The pension obligation is the present value of all future payments to the retired employees.
Pension assets are either received through the employees and company or they are earned by the plan.
What is the goal of the pension plan administrators?
Ensure that the assets of the plan are roughly equal to or greater than the pension obligation.
How do we value the pension obligation? What are the two actuarial methods to calculate these? What is the accounting standard required?
the pension obligation is the present value of the future payments of the plan to the retirees. The level contribution method and the accrued benefit method. The accrued benefits is required under accounting standards.
What is the vested benefit obligation method?
This method is where the present value is only calculated through the vested benefits, this is only the obligation that the company has to the employee, and thus it may be quite understated, as eventually the employee may have all benefits vested to them.
What is the accumulated benefit obligation method?
This calculates the present value by using both the vested and unvested portions of the obligation but it assumes that the salary of the employee will not rise over their working lives. Ignores salary escalation due to the uncertainty in the estimate.
What is the projected benefit obligation?
This calculates the present value by using the vested, unvested, and expected future salaries, and this is the preferred method under accounting since it is conservative in nature, has a higher obligation and is more realistic.
What does it mean when a pension plan lists this projected benefit obligation? Under ASPE, how is this value determined?
Under both IFRS and ASPE, it means that they are defined benefit obligations. Under ASPE and IFRS, this value is determined through actuarial valuation for accounting purposes, or another option under ASPE is the value for funding purposes (Legislative requirements, salary levels, and different discount rates.
What is the funded status of the plan? What is an underfunded plan and what causes them, and who bears the risk?
It is the difference between the plan’s assets and the obligations. The situation where the pension obligation is greater than the assets. With the recession and low interest rates, the company bears the risk, thus this will be a liability on the financial statements.
How will the funded status of the plan be shown by the company? What is the terminology used on the financial statements for the company? What is the terminology used for the financial statements for the pension plan provider?
It will be shown as a net asset or a net liability, and not separate assets and liabilities.
It will have a pension liability or a pension asset account for the company.
It will have pension plan asset and a pension plan obligation.
With respect to pensions, what are two decisions that a company will make before preparing financial statements?
- Determine the pension expense
- Decide whether it will pay an amount into the plan right now.
T or F: Pension Liability = Pension Plans Assets - Pension Plan Obligations
True
T or F: If the pension plans assets and obligations change, it may impact the determination of the pension expense on the side of the company?
True
What are the different parts of a pension expense.
- Current service cost
- Past service cost
- Interest on present obligation
- Expected return on plan assets
- Re-measurement gains and losses
- Actuarial gains and losses
- Change in valuation allowance.
What is the current service cost?
How is this cost determined?
When does this cost commence?
What is an attribution period?
Benefit earned by employees for the current year of service.
It is determined through actuarial calculations with various factors and future salary amounts.
Commences when they are hired and continue past even when they receive all their future benefits.
It is the time between when the employee is first hired and when they get their full benefits.
What is a past service cost?
Does this relate to prior periods and when do we record it as a pension expense?
A cost that arises when there is an adoption of a plan or an amendment that would create additional benefits for services that were done in the past.
This does not classify as a prior period as the amendment or adoption did not previously exist, it it recorded as a pension expense in the year they arise.
When calculating interest on the obligation what information is needed?
- Average balance of the obligation between the beginning of the period and the end of the period.
- Unless otherwise specified, the changes in the plan are evenly throughout the year.
- Discount rate - Current market interest rate for high-quality debt instruments, but ASPE permits the settlement rate.
What is the expected return on the plan’s assets?
What rate is used to calculate the return on assets?
How do we calculate the expected return?
The interest or other income from the plan’s assets.
The same rate is used to calculate interest on the obligation.
The expected return is calculated as the expected return on the average plan’s assets during the year, not the opening plan’s assets.
What is an actuarial gain or loss?
What causes these actuarial gains and losses?
It is when the plans obligation or assets are different compared to what was expected.
Inaccurate estimates or assumptions made in determining the rate of return.
What is an asset experience gain/loss? What is this referred to as?
When the actual return on the plan’s assets differs from the expected return on the plan’s assets. This is referred to as a remeasurement gain or loss.
What is a liability experience gain / loss? What are these referred to as?
Arises when the assumptions about current service costs, or interest costs on the plan obligation differ from the actual results. These are referred to as actuarial gains or losses.
When do we assume that actuarial gains and losses occur? When do we assume remeasurement gains and losses occur?
We assume that they happen at the end of the year. We assume that they occur throughout the year since they relate to the rate of return.
Where are actuarial gains/losses and remeasurement gains/losses recorded under IFRS and ASPE?
IFRS - Recorded under OCI
ASPE - Recorded under pension expense
What does amendment IAS 19 state regarding financial reporting of the pension expense and the expected returns and interest costs?
While not required, it suggests that separating them from the pension expense and disclosing it that way, may be more beneficial.
How does a pension asset or a pension liability appear on the statement of financial position for the firm?
It is a pension asset if it is overpaid, and it is a pension liability if it is underpaid.
Describe the legal perspective of legal title for pension plans. How much can we value if we can state that we have legal title too.
From the legal perspective, it may be difficult to argue that we hold the asset, as it is in the hands of the pension plan. However, if it can, the value of the asset that the company can report as having legal title to is the ceiling.
What is the valuation allowance? What is an example?
It is a contra account to the pension asset account. It would appear below the pension asset account. Assume that the pension asset is 25,000, but the ceiling to which you can claim legal title to is 5000, therefore recording the following entry:
Pension Expense - 20,000
Valuation Allowance - 20,000
What do we disclose under ASPE with regard to pension plans?
- Description of the plans
- Most recent actuarial valuation
- Pension Expense (Components that do not recur separately on the face of the statement or notes)
- Pension liability
What do we disclose under IFRS with regard to pension plans?
- Pension expense for the period
- Pension asset or liability on the SFP
- Assumption underlying pension calculations such as discount rate used to calculate the interest, expected rates and compensation increases.
- Reconciliation of the movement in the defined benefits obligation and planned assets.
- Sensitivity of assumptions made.
